Solving the Forecast Combination Puzzle

Tae-Hwy Lee () and Saerom Lee ()
Additional contact information
Tae-Hwy Lee: Department of Economics, University of California Riverside
Saerom Lee: University of California, Riverside

No 202514, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper addresses the forecast combination puzzle—the empirical observation that a simple average of individual forecasts, using equal weights, often outperforms more sophisticated combination methods. We propose a novel forecast combination approach designed to improve upon the simple average, particularly when the number of forecasts is large relative to the sample size. In our framework, the simple average is treated as a common factor shared across all individual forecasts. We then identify additional common factors and idiosyncratic components that enhance the predictive content beyond that captured by the simple average. Empirical applications in macroeconomic forecasting demonstrate that our method yields more accurate forecasts than the simple average and helps resolve the forecast combination puzzle. The procedure can be started with any combined forecast and iterated until no further improvement is achieved.

Keywords: simple average; common factors; idiosyncratic components; forecast combination puzzle; encompassing; high dimension; sparsity (search for similar items in EconPapers)
JEL-codes: C22 C32 (search for similar items in EconPapers)
Pages: 21 Pages
Date: 2015-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economics.ucr.edu/repec/ucr/wpaper/202514.pdf First version, 2015 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:202514

Access Statistics for this paper

More papers in Working Papers from University of California at Riverside, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Kelvin Mac ().